Institutional share classes of the index LifePath target-date funds will carry expense ratios of 24 to 31 basis points, vs. expense ratios of 85 basis points across the board for the actively managed version of those funds, Castille says. The amount of assets required to qualify for institutional share classes varies depending on the record keeping platform the plan sponsor uses, he says. The index LifePath funds have the same glidepath as the active funds.

Defined-contribution plans' use of index funds has grown “significantly” since the 1990s, says Winfield Evens, an investment consultant at Aon Hewitt. Winfield notes, though, that most plans offer both index funds and actively managed funds, and plan sponsors that offer only index funds are in the minority.

Plans are most likely to use index funds in the most efficient parts of the market, Evens says, where active managers are least likely to add value, such as large-cap U.S. stocks. Aon Hewitt's annual survey of defined-contribution plans, which will be released soon, shows that 95% of the 546 defined-contribution plans surveyed offer S&P 500 funds, and 42% offer an indexed intermediate bond fund.

As plan sponsors increasingly focus on the cost of 401(k) investments, the lower price tag on passive investments is looking better and better.

“Obviously index funds are going to have a lower cost structure,” Evens says. “A plan sponsor can never know what next year's return will be. You have a good sense of what next year's fees will be. In any fund decision, cost is a key decision point.”

Evens notes that calling target-date funds a passive investment is a bit of a misnomer, since the decision on how to alter the funds' asset allocation over time “is an active choice” on the part of the fund company. “We know from a lot of finance theory that the most important decision is the split between stocks and bonds,” he says.

Stephen Butler, CEO of Pension Dynamics, which helps companies design and administer their 401(k) plans, says using indexed funds eliminates the difficult task of picking active managers. “We all know who's done well over the last three, 10, 12 years, but we don't know prospectively who's going to continue to beat their competitors going forward,” Butler says. “The value of an index fund is that you know that you'll beat 70% of the actively managed funds” in that asset class, he adds.

For a look at how tiered investment strategies can make selecting funds easier for 401(k) participants, see Cheers for 401(k) Tiers.